Authors libby rittenberg 443
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equal for the two factors. In general, a profit-maximizing firm will seek a
combination of factors such that
Equation 8.10
MP1=MP2=...=MPn
P1
P2
Pn
When a firm satisfies the condition given in for efficient use, it produces
the greatest possible output for a given cost. To put it another way, the
firm achieves the lowest possible cost for a given level of output.
As the price of labor rises, the firm will shift to a factor mix that uses
relatively more capital and relatively less labor. As a firm increases its
ratio of capital to labor, we say it is becoming morecapital intensive. A
lower price for labor will lead the firm to use relatively more labor and less
capital, reducing its ratio of capital to labor. As a firm reduces its ratio of
capital to labor, we say it is becoming more labor intensive. The notions of
labor-intensive and capital-intensive production are purely relative; they
imply only that a firm has a higher or lower ratio of capital to labor.
Sometimes economists speak of labor-intensive versus capital-intensive
countries in the same manner. One implication of the marginal decision
rule for factor use is that firms in countries where labor is relatively
expensive, such as the United States, will use capital-intensive production
methods. Less developed countries, where labor is relatively cheap, will
use labor-intensive methods.
Now that we understand how to apply the marginal decision rule to the
problem of choosing the mix of factors, we can answer the question that
began this chapter: Why does the United States employ a capital-intensive
Attributed to Libby Rittenberg and Timothy Tregarthen
Saylor URL: />
Saylor.org
443
